ADP Q4 Earnings & Revenues Surpass Estimates, Rise Y/Y

Automatic Data Processing, Inc. ADP reported strong fourth-quarter fiscal 2018 results, wherein both earnings and revenues surpassed the Zacks Consensus Estimate.

Adjusted earnings per share of 92 cents beat the Zacks Consensus Estimate by 2 cents and increased 39.4% year over year. The bottom line benefited from lower effective tax rate and fewer shares outstanding. Notably, ADP enjoyed a lower effective tax rate of 28.7% compared with 32.2% in the year-ago quarter, on an adjusted basis

Total revenues of $3.32 billion outpaced the consensus mark by $31.1 million. The top-line figure improved 8% on a reported basis and 6% on a constant-currency basis.

So far this year, shares of ADP have gained 15.2%, outperforming the industry’s growth of 9.2%.

Segment in Details

Employer Services revenues of $2.49 billion increased 7% year over year on a reported basis and 4% on an organic constant-currency basis. The number of employees on ADP clients' payrolls in the United States rose 3.1% on a same-store sales basis. Client revenue retention however declined 120 basis points (bps) on a year-over-year basis.

PEO Services revenues were up 10% year over year to $976.7 million. The upside was driven by 8% increase in average worksite employees for the reported quarter. Average worksite employees paid by PEO Services were roughly 523,000.

Interest on funds held for clients in the fiscal fourth quarter increased 20% to $126 million. The company’s average client funds balances climbed 4% year over year and 3% on a constant currency basis to $24.9 billion. Average interest yield on client funds was 2%, up 30 bps on a year-over-year basis.

Margins

Adjusted EBIT came in at $575.6 million, up 31.2% on a year-over-year basis. Adjusted EBIT margin increased about 300 bps in the quarter to 17.3%. The margin improvement was driven by benefits from operational efficiencies and transformation initiatives, which was, however, offset in part by acquisition-related expenses.

Segment-wise, Employer Services segment’s margin increased 200 bps on a year-over-year basis. The same for PEO Services segment improved approximately 60 bps in the quarter.

Balance Sheet and Cash Flow

ADP exited fourth-quarter fiscal 2018 with cash and cash equivalents of $2.17 billion compared with $2.29 billion in the prior quarter. Long-term debt of $2 billion remained flat with the prior quarter.

The company generated $2.52 billion of cash from operating activities in the reported quarter.

The company paid dividends worth $1.06 billion and repurchased shares worth $989.3 million in fiscal 2018.

Fiscal 2019 Outlook

ADP provided outlook for fiscal 2019. The company expects revenue growth of 5% to 7% and adjusted EBIT increase of 100 to 125 bps. Adjusted earnings per share are expected to register growth of 13% to 15%. Adjusted effective tax rate is anticipated around 25.1%.

Zacks Rank & Upcoming Releases

ADP currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Investors interested in the broader Business Services sector are keenly awaiting second-quarter earnings reports from key players like Avis Budget CAR, Genpact G and Delphi Technologies DLPH. While Avis Budget and Genpact will report their quarterly numbers on Aug 7, Delphi Technologies will release results on Aug 8.

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